- The loans operate on a DeFi platform unconnected to the Bitcoin blockchain, raising concerns about decentralization.
- True Bitcoin-backed solutions could address tax liabilities and provide liquidity without relinquishing asset ownership.
Coinbase has unveiled its “Bitcoin-Backed Loans,” a product intended to provide liquidity to Bitcoin holders without forcing them to sell their assets. However, the name and execution of this offering are already stirring controversy in the crypto community due to misleading claims and reliance on centralized systems.
Not Bitcoin-Backed, Not Bitcoin-Native
Despite its name, Coinbase’s loans are not backed by Bitcoin itself but by cbBTC, a wrapped Bitcoin product managed by Coinbase. Unlike Bitcoin, cbBTC introduces additional layers of trust and centralization. The underlying Bitcoin backing these tokens is held in Coinbase-managed reserve wallets, with funds distributed across cold storage facilities.
The loans are not issued on the Bitcoin blockchain or any of its related networks, such as sidechains or Layer 2 solutions. Instead, they are deployed on Morpho Labs, a decentralized finance (DeFi) platform designed to rival AAVE. While Morpho has an established reputation, its detachment from Bitcoin raises questions about the relevance of its use for Bitcoin-backed loans.
Why Bitcoin-Native Loans Are Necessary
True Bitcoin-backed loans could solve several issues for Bitcoin holders. Many face heavy tax burdens when selling their Bitcoin to fund major purchases. Loans collateralized by Bitcoin allow holders to access liquidity without triggering taxable events or forfeiting their exposure to Bitcoin’s long-term growth potential.
The current market lacks native Bitcoin-backed solutions. Existing options rely heavily on centralized platforms, or on DeFi protocols that often fail to minimize trust assumptions. Platforms like Lava.xyz are working to address this gap, enabling Bitcoiners to maintain custody of their coins while accessing financial services. While promising, these solutions are still in their infancy compared to mainstream DeFi platforms.
A Centralized Offering in Disguise
Coinbase’s loans represent a hybrid approach: centralized custody and management paired with DeFi branding. Max Branzburg, Coinbase’s vice president of product, described the offering as “TradFi in the front, DeFi in the back.”
However, critics argue it is more accurately described as centralized throughout. This reliance on centralized control undermines the ideals of decentralization that Bitcoin embodies.